November 2, 2009

(Update 11-5) The Great American Health Care Bubble (and why we spend twice as much as Europe per person)

Sometimes it pays to step back and look at the big picture in a fresh way -- sometimes you see something new.

Sometimes the air clears and you see the mountain.

A new thought about health care costs hit me recently.

I'll lay out a broad insight which has profound implications in the second half of this post, but first I'd like you to see how certain commonly reported numbers about health care in America fit together.

Why American Care Costs Twice As Much

We often hear health care costs Americans "about twice as much as the high quality care in Europe."
Here is a graph showing health care spending by nation. (click here for more) (Source: Organization for Economic Cooperation and Development via the NYTimes Prescriptions blog)
(click on graph for larger version)

So European health care costs roughly 1/2 as much as American health care and has similar (high) quality.

Wasted Procedures
Now, many will have heard that about 30% of health care in America is for wasted procedures.

For example this NPR piece: "Of the $2 trillion-plus spent on health care in this country each year, about 30 percent, or $660 billion is wasted."

Or from the Health Care Blog: Fee-for-service incentives are a key reason why at least 30% of the $2.5 trillion expended annually for American health care is unnecessary. (I like Maggie Mahar's version here.)
Here's a RAND report: "On average, it appears that one-third or more of all procedures performed in the United States are of questionable benefit."
It is not always obvious to non-scientists just what is of "questionable benefit." I recommend to everyone the NPR story about hysterectomies in Maine.
Once you read or listen to that, you'll begin to suspect what is going on.
For those wanting a broad and precise picture, I strongly recommend this brief summary article. For a quick glance only see this graph (note the shockingly higher costs in Miami are adjusted for age, community health, etc., so the pattern of health care practices in some cities or areas doing more procedures for certain health conditions than is done in other localities -- more treatment without better results -- isn't about age or gender, etc. It's about local medical cultures and practices).
So we lose about 30% of health care dollars in this way. Another way of expressing this is that only 70% of American health care procedures are medically needed as demonstrated by health outcomes versus other treatment regimens.

High Prices (are only a piece of a broader measure)
Next one might ask, what of the fact U.S. medical prices for procedures are generally higher than those in other nations?
At first it may seem the fact that many individual health care procedures cost more in the U.S. than in other countries is an additional, separate factor in costs.
But the cost of a procedure is only a fragment of a more complete measure of cost -- the total cost to effectively treat a specific condition.
We know that other countries have wasted medical procedures also. Might there sometimes be a good reason American doctors cost more? If a doctor is more effective, so that he's on target with his diagnoses and treatments and finishes treating a patient successfully sooner, then such a doctor should be paid more per procedure than one who is less effective on average.
A doctor that treats a certain narrow condition successfully 90% of the time in 2 hours is delivering more value per hour than a doctor that treats the same narrow condition successfully 60% of the time in 2 hours. (See how to structure payment to increase quality instead of quantity of care.)
Talking about the expense of wasted procedures is another way of talking about the relation of effectiveness and pay rates (e.g. -- which higher pay rates correspond to relatively effective treatments and consultations?).
More highly skilled workers earn more because they produce more (more good results in the same hours of work). If many U.S. doctors are going to earn relatively high pay per hour, eventually some insurers will begin to require that they are highly effective -- as prices get high enough the practical cost will eventually bring comparisons and valuing. One change that may aid the valuing of treatment will be the increased number of patients reform will bring, which will allow doctors to increase revenue by treating more patients instead of doing more treatments per patient.
If a doctor or group of doctors quickly treat patients in an effective manner (various successful or good outcomes with less total treatment than other providers), then their high rate of pay per hour is justified.
Under the coming move from paying for services (fee for service) to paying for quality (such as paying for outcomes over time) to talk of both pay rates and of wasted procedures is to discuss the same issue (value, or the cost to treat a certain condition) from different angles. It is the most realistic and practical to work towards increasing health care providers true productivity (the proportion of successful treatments and number of patients benefited).
Treating more patients nationwide for only a little more total health spending can be done if incentives and innovation raise the average level of treatment effectiveness.
The best way to balance the system is to pay for outcomes instead of simply for services.
This kind of reform is actually the direction the health care market is moving towards in scattered locations. Some providers are already adopting their side of such changes. Insurers, including Medicare, need to catch up. Medicare is a big force, and the progress of Medicare in adopting already existing innovations will help greatly.

Administrative Waste (it's bigger than you'd guess)
Now, many of you will also have heard that we waste about a quarter (-25%) of health care dollars on administration and overhead for insurers and medical providers to fight with one another over reimbursements, and also for insurers to screen out preexisting conditions, etc.

For instance here: HASC estimates that as much as a quarter of U.S. healthcare spending goes to administrative functions, not patient-centered services.
There are other studies on administrative costs (update: Reuters offers another overview of waste), and they reach somewhat different (but still large) numbers, so I'll demonstrate a broad numerical conclusion myself as follows:
First, consider the known average payout ratio (also called the medical loss ratio) -- that portion American private insurers take in from premiums which they then pay out for actual health care: about 80%. So, private insurers keep on average about 20% of incoming premiums for administration, profits, and the costs of screening out (dropping and excluding) sick people, etc. Next, compare this to the administrative costs of Medicare, which are about 3% to 6%, depending on whether related spending by other federal agencies is included (including the spending from other agencies raises the total Medicare administrative costs to that 6% region).
These two numerical facts together give a rough but clear indication of the non-health-care costs above essential administration diverted by private insurers away from health care.
Compare the total non-medical private insurance costs of 20% to Medicare's broadly-inclusive costs of about 6%, and we get a difference of about 14%.
So for private insurers, roughly 14% of health care dollars are spent in ways that do not pay for or help to organize or administer health care. The remaining 6% of private insurer costs we'll consider necessary for needed administration.
Finally, we must add in the costs that doctors and hospitals pay to deal with the blizzard of insurance claim forms. It takes a lot of administrative workers at hospitals and doctors offices to try to get paid from private insurers for what doctors and nurses do. Insurers often initially deny certain cost items for confusing reasons, and...well, these insurance claim paperwork costs inside doctors' offices and hospitals add up, as numerous articles point out. Put these costs together with the roughly 14% excess costs inside private insurers....and that 25% total administrative waste in the U.S. found by HASC starts to sound entirely plausible, if not low.
Ok. Let's remember this rough number of -25% for administrative waste. Another way of expressing this is that only about 75% of the dollars spent on health care are actually spent on health care and it's organization and needed administration.
Putting Together the Numbers -- How Much Waste Is There?
By this time, those of you that think about numbers and percentages every day in a habitual way like I do will begin to see where I am going with this...
So I'll cut to the chase.
Let's do the math, and get a ballpark look at American health care without all the waste -- without excess overhead, and without medical providers being paid to do unneeded treatments that don't improve health outcomes.
0.75 (rough portion of health care dollars actually spent on care and needed organization) * 0.7 (rough portion of care actually medically indicated by best practices) = about 0.5 (rough portion of health care dollars spent to achieve health outcomes)
Hmmm.... That looks familiar. About 1/2.
That's the same ratio as European health care costs versus American health costs.
I think we have a winner -- Europe: Point. Set. Match. appears American doctors and hospitals are reasonably efficient and effective when they get down to it!
Simply reducing administrative waste and treatments that have little benefit compared to alternatives would allow American doctors to deliver European-level costs with American-level take home pay!
Altogether, the real cost problem comes from the way we pay for care and the perverse incentives this structure sets up.
(Update: This American Life examines some of the issues discussed in this post.)

Part II:
The Great American Health Care Bubble (and the beginning of collapse)
Now it's time to lay out an insight that has come to me over the last couple of weeks.
How could American health care costs have skyrocketed so wildly?
Remember the first graph here?
As you can see in that first graph, starting in about 1980 American health care costs took off and left the rest of the advanced nations behind. American health spending shot into the sky.
1980. That's not long after 1978.
Does 1978 ring a bell?
That's when credit card laws effectively changed:
...the 1978 Supreme Court decision Marquette Vs. First Omaha Service Corp. affected the locations of the top 10 credit card issuers. Today, all are located in states with very high interest caps or none at all.
Basically, state usury laws capped credit card interest rates before 1978. With the new Supreme Court ruling in 1978, credit card issuers in the states with the highest allowed rates could now send out cards that could use those higher rates across the nation for the first time.
Armed with the power to gain huge profits via these newly freed interest rates, credit card companies began to look for a lot of new customers. Thus, slowly and inevitably began the Great Credit Bubble, increased over the decades by more and more easy money from around the world.
The means by which health care costs could escalate so wildly over the last 30 years is via the same fundamental enabler which led to the 1980s housing bubble, the 1990s stock market bubble, and the huge 2000s-era housing bubble.
These bubbles have all been enabled by the widening availability of easy money in more and more forms, from credit cards to piggy-back mortgages.
If your health insurance payments or out-of-pocket costs became too large, you could just buy more on your credit cards today and then refinance or take a 2nd mortgage tomorrow.
When there is more and more easy money available, then things that are especially valued like health care or housing tend to suck up that easy money like vacuum cleaners.
Along with the great housing bubble, we've had the Great American Health Care Bubble.
Of course...bubbles normally pop.
For health care, which is powerfully supported by insurance (slowly paying over time), the eventual bursting of the bubble requires a serious recession and time. Time for more and more people to lose their insurance or not to be able to pay for as much insurance.
The bursting of the Health Care Bubble would naturally be in slow-motion, more like the Titanic just after the iceberg -- for quite a while it's not obvious to many on ship what's going to happen....
Senator Olympia Snowe just before the decisive, final Senate Finance Committee vote: “It’s akin to the Titanic — turning the Titanic around before it hits an iceberg.”
But the great ship American Health Care has already hit the iceberg (the recession). Now it's a matter of whether we have the cleverness to do something, or whether most people will just end up out at sea.
The outcome of the health care bubble would naturally be more and more bankruptcies. First progressively more individuals and families, then eventually more and more doctor's offices and hospitals. Bankruptcies spreading and accelerating, everywhere across American health care.
Just like the housing price collapse, we'd have a medical "crisis" starting to really accelerate I believe in 2010.  (but note this perspective is in 2009, and the passage of Health Care Reform is a big unknown, as is the question of such huge supports as Obama's idea of paying 65% of COBRA costs for those losing their jobs....)
Just like the "credit crisis" and housing collapse, we are close to a medical cost "crisis" (a sudden change), where all at once a lot of hospitals and doctors will be facing radical cuts in staff and/or bankruptcy. Insurance does make this happen in more of a slow motion way. But the slow motion will only stretch out the sudden shift out to a period of 6-18 months I think.
A year from now, we could be looking at very different news headlines about the health care system.
Unless...unless government steps in and saves hospitals and such by diverting more money from elsewhere into the health care sector, propping up the high-cost providers of health care. When government steps in during the bursting of a bubble, taxpayers become the ones that take the hit.
Even now, government has already stepped in to significantly slow the sinking of the ship.
Normally, when a person loses their job, they lose their existing health insurance unless they can pay the full health insurance premium themselves without a job, using up savings. Keeping your existing insurance by paying the full premium yourself is allowed under COBRA for up to 18 months. The high cost of COBRA health insurance premiums are a surprise to many people, who do not realize how much their health insurance actually costs until they suddenly bear the full cost by themselves. This high cost that employers have been paying under sharp health care inflation has eaten so much money that pay raises have barely exceeded inflation for many years now.
The stimulus bill included a special provision to pay 65% of the cost of COBRA health insurance for 9 months.
Only this has slowed the sudden crisis of a collapsing health care bubble in the Great Recession.
This delay is temporary.
In fact, the collapse has begun (new nurses are having "sudden" trouble finding jobs).
The fact that American health care costs are unsustainably high today (before any further cost inflation) is yet another reason why Congress should prioritize and emphasize bending the cost curve (and here's how to).
We already send a huge amount of money in our economy to health care. Enough to give everyone excellent care.
If Government props up American health care spending, for instance by extending the COBRA subsidy to a longer time period, and later by subsidizing premiums for many Americans under reform, it also needs to effectively stop health care inflation soon by encouraging Medicare to adopt already existing innovations in payment.
Such change is easy to do incrementally, starting with the treatment of certain common, specific conditions using some method of pay for outcome such as by bundled payments with incentives or other methods already in use. The pay-for-outcome-over-time system I offer on this blog can be used incrementally (starting with certain specific conditions and modest incentives), and is similar in some ways to a bundled payment system with incentives. "Pilot programs" can be an avenue for such modernization of Medicare, if they are set up with the clear understanding that they are meant to be a working process to transform payment over a defined period of time. The goal of payment reform is to improve "Quality" -- to set up incentives that depend on the outcomes of treatment.
The alternative of just supporting the status quo would not be pretty.
Meanwhile....perhaps it is indeed good that most of health care reform happens years from now, and cannot be blamed for the coming massive financial crisis and fallout of the bursting Great American Health Care Bubble.
The natural (and dramatic) deflation (collapse) of the bubble will help bend the cost curve.
The best fact to communicate to the American people is that health care itself has been in a price bubble, and will have to correct.

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